Retirement can be the golden period of your life. A substantial nest egg will make it even better.
Here are seven steps that can help you get there:
1. Start with creating an emergency or a contingency fund:
All long term investment begins only after keeping aside 3 to 6 months of your salary or income in FDs (Fixed Deposits) or Savings Bank Accounts for any exigencies. You should start by being prepared for the unexpected.
2. Starting Early is Half the Job Done:
Start saving right from the first year of employment as it will help you to tap the power of compounding. It could be as little as 10 per cent of your salary and should be around 25 per cent if you do not have an education loan to repay. The problem is no one starts thinking, let alone planning for retirement at such a young age.
3. Asset Creation is the Key:
Be it moveable or immovable ones. Today owning a TV, Refrigerator, laptops and mobile phones is a given.At the same time can’t a certain portion of your spending be diverted to real estate? Buying one in the metros maybe difficult but one in the smaller towns and cities may actually deliver better returns. You may also get significant tax benefits on real estate investments.
4. Asset Allocation and Diversification Leads to Success:
Follow the old dictum of not putting all your eggs in one basket and opt for different savings tools.There should be the right mix of debt, equity, gold and real estate. While there is no specific formula, the thumb rule is that 100 minus your age should be the allocation for equity and the rest should be in debt instruments. Apart from 12 per cent PF deducted by your employer, investing in the Sukanya Samriddhi Yojana if you are blessed with a baby girl can help you get there. In terms of equity since most people lack the expertise and time to track equity markets, the best thing to do would be to invest in a Systematic Investment Plan (SIP) with an established player in a diversified equity scheme. It is an easy tool to invest in regularly, in a disciplined way, to create long-term wealth.
The question then arises as to what do you do when you already have a huge housing loan? In such a case based on your lifestyle, you can allocate the balance towards other assets.
You may invest in gold, the traditional hedge against volatility and inflation, but not beyond 10 per cent of your total assets.The National Pension Scheme is emerging as an attractive option with the Government now exempting tax from the sum withdrawn on retirement.
5. Periodic Review of Your Investment is a MUST:
You should regularly review and assess the performance of your portfolio. It should not be too frequent, like daily or monthly, but at quarterly/half-yearly intervals. If you’re close to your retirement or your monetary goal, it is prudent to move the equity investment to debt fund or bank’s Fixed Deposits (FDs) six to nine months in advance so that you are able to protect the gains made. Although these might not give you phenomenal returns, you should park at least some part of your corpus in FDs to avoid any risks and to protect your principal amount. Besides,these are liquid and generally safe.
Once you near your retirement, or you’ve retired, moderate your return expectations. As long as you are able to beat the inflation and conserve your principal amount, you should be happy.
6. Protect yourself when you are Young:
You must have adequate term insurance and health protection right from a young age. Term insurance ensures protection for your family. Medical insurance means that you need not dip into your hard-earned savings kitty in the event of an accident or a life-threatening disease especially in your old age.The premium that you pay for protecting yourself at a young age is much lower. On your retirement barring exceptions, you will not be able to avail of the health insurance cover provided by your employers. At that stage, it will be difficult if not impossible to buy one.
7. Take Expert Advice:
Just as you do not miss your regular medical check- ups, you must seek advice from financial experts periodically. Your bank manager or a good friend/neighbor with a background in finance can help. As also certified financial planners.
You end also with expecting the unexpected. This advice is based on a normal economy. However, if there are unforeseen circumstances, then everything changes. If you start early, you can surely overcome even such unexpected situations with comfort and confidence.
Madhusudan Hegde, the author is a Branch Banking Head, South at HDFC Bank.